Financial Accounting Theory - Harmonization of International Financial Reporting Standards - Research Paper Example

RESEARCH PROJECT Harmonization of international financial reporting standards (IFRS) Introduction Accounting is a fundamental element in organization and running of a business enterprise. It determines the ability of a business to survive in the global world of intense demand and supply mechanisms (McLaney, 2009). Accounting is recording of a company’s financial statements in the company, in order to plan and monitor the incomes and expenditures on normal running of the business. Accounting is integral in recording the types of profits a company has, and the losses incurred. To achieve control of the business, acquire business sophistication and gauging the growth of businesses, there are financial accounting processes that have been formulated. Financing accounting theories outlines how the processes of accounting shall be done in a company. Different companies adopt different financial accounting theories depending on their size, and the control of the business in the business markets (McLaney, 2009). Research objectives International financial reporting standards (IFRS) The research is geared towards understanding formulation and implementation of harmonized global reporting standards is logical in the ever-changing global markets, helps develop and harmonize standards that favour both small and bigger markets. Other benefits of IFRS include highlight factors that hinder effective harmonization of international reporting standards, highlight the advantage of having harmonized international reporting standards, and effects that will be realized by nations who do not implement harmonized international reporting standards and the effects to those nations that does (Needles & Powers, 2009). The international financial reporting standards are rules set out in accounting or standards formulated and proposed by International Accounting Standards Board, that has its headquarters in London. The formation of these standards has been necessitated by increased integration of large markets and politics globally, which is brought up by reduction in the costs of processing information and communications (IFRS, 2005) Over the years, there has been an increasing need to harmonize accounting processes in order to give room to globalization and creation of one market in the new world market order. Reporting standards are meant to help businesses indulge in high quality and understandable accounting processes, which in turn are useful to investors and potential markets (Needles & Powers, 2009). Investors are able to invest wisely because through the financial reports, they are able to get a company’s accurate economic realities, which are its liabilities, assets, and debts. The accounting reporting standards have help give timely statements on addition of economic value, show business performance whether good or bad and have been integral in eliminating manipulation of financial statements by managers (Saudagaran, 2009). It is important to harmonize global reporting standards because, unlike traditional reporting standards like standards that are influenced by law, taxes and politics, harmonized international reporting standards, and depicts and concentrates on showing economic substance more rather than legal forms. Other benefits includes giving timely reports on gains and losses of business economy, provide informative and effective balance sheets, allow earnings to be more informative than previously were, and help curb unethical practices by financiers (Needles & Powers, 2009). Benefits of Harmonizing Accounting Reports to Investors Nations that approve the use of harmonized reporting standards internationally agree that such standards are able to help businesses provide accurate, up to date, detailed financial statements. The fact that the system of report is similar universally, foreign investors are able to acquire information on oversee companies, access detailed information on businesses. This is valuable in helping them value equity markets from an informed point of view (IFRS, 2005). Through adverse selection low empowered investors are able to know which companies to merge with, allows them to compete alongside able businesses and professionals, thus healthy market competition. Investors are able to cut costs. This is because the harmonized standards help regulate different international reporting standards created in different countries, hence easy access and processing of financial information of institutions with large financial databases (Needles & Powers, 2009). Investors moreover, benefit from market efficiency realized after reduction of costs of processing financial statements, which is influenced by the boost of the share prices in the stock markets. Limitations of Harmonizing Reports Global markets and market forces are geared by individual nation’s markets and politics rather than global markets and politics. Uniformity is hard especially in small economies than in strong economies, thus small economies are able to accrue more losses and affected diversely, especially in times of global financial crises. Nations are more likely to adapt to guidelines that favour their businesses rather than adapt to the standards fully. The research will help highlight factors that will make a market more local than universal (IFRS, 2005). Among the elements that will make markets more localized are the extent and nature of involvement by the government. Government involvement may be though direct investments or policies and regulations, political involvement and political influence of financiers, report writers and labour unions, policy laws on securities, legal entities, business ratings by the media, opinion leaders, financial analysts of a particular country, and ownership of businesses enterprises be it private or public (Saudagaran, 2009). Other factors are the competence of auditors, the extension of intermediation of financial systems and family- owned business ventures, structures of a country’s financial markets and its depth, and the willingness of companies to use its financial statement in their management and when compensating. Corporations that use the harmonized reporting standards are more likely to experience stagnation caused by lack of competition, thus creating a centralized systems of marketing (IFRS, 2005). Competition is important in any market since it breeds innovations and inventions, allows corporations to adapt quickly to new changes in the market environment, helps improve quality of products and services, eliminates complacency by corporations, and eliminates bureaucracy and monopolization. Such standards are prone to being polarized, and infiltrated with politics and bureaucracy (Needles & Powers, 2009). Not withstanding is the fact that harmonizing reports favour fair value markets, which are not favourable to developing economies, and the quality of the standards is influenced by the competence of auditors and other financial personnel. Theoretical Perspectives on Harmonizing International Financial Reporting Standards Financing accounting theories are sets of coherent principles that are conceptual, hypothetical and pragmatic in nature, and helps in formation of guidelines and frameworks of referencing in financial accounts (IFRS, 2005). They outline how the processes of accounting shall be done in a company. Different companies adopt different financial accounting theories depending on their size, their control of the business in the business markets, and the function of the financial theory like describing an accounting practice or prescribing an accounting practice or an accounting program (Needles & Powers, 2009). The research seeks to understand the importance of financial reporting and the significance and use of financial accounting theories in helping advocate for harmonization of international financial reporting standards. Accounting theories are formulated from logical reasoning. In order for an accounting theory to be formulated, behaviour of a people in regards to accounting information is considered. Moreover, the reasons why corporations would want to supply the public with particular information (IFRS, 2005). Positive Financial Accounting Theory Such financial accounting theories are the positivist approach to accounting (Scott, 2006). This theory forms its findings on explaining a phenomenon and predicting when and how they will occur in the future all the factors remaining constant i.e. actual practices in accounting. positivist accounting theories are derived from observing events in the past, the environment surrounding the event and the factors influencing its occurrence, thus explaining why people behave as they do or why things are as they are(Comte, 2010). Positive accounting theory explains and predicts why managers prefer to use an accounting methodology to the other. Management that uses this theory may do so to show the efficiency aspects of its company, where they seek to inform the public which are their core market (existing or potential), and investors be it present or potential, their financial standings and its performance(Scott, 2006). The other reason that the management may be influenced to use the positivist approach is for opportunistic reasons. Accountants are more likely to adopt an accounting methodology that will help them earn more, or increase their self-interests. Such accounting programs allow them to gain as the company does so. In positive accounting theory, there is the hypothesis that accountants who accrue benefits, allowances and incentives that are determined by the performance of the company’s financial performance, are likely to adapt accounting methods that they can interfere with in order to show the company is doing better than it actually is (Comte, 2010). They use methods that will indicate low profits at the start and higher profits at the end of the financial year. Moreover, the management may eliminate costs from researches and other developmental ventures in their accounting, since they will lower the annual profit margins. The other hypothesis is about debts. Financial institutions tend to lend easily with minimal regulations to companies with high profit margins than in those with low profit margins (Comte, 2010). Therefore, a manager will try to manipulate accounting data to show high liquidity and great performance in paying principles and interests in prior loans/ debts. Finally, high profit making organizations have been known to show financial profits that are low than they really are, by using accounting methods that favour so (Scott, 2006). They do this to avoid notice by the government, which tends to charge and give high regulation measures especially for foreign corporations. This theory can be used as a basis to eliminate harmonization of international financial reporting standards, since the quality of the financial reports is based on the integrity of the auditors, managers and accountants, to present the true reality of the performance of the firm. Since these personnel are paid their incentives and benefits by the local administration and not an international legislated body, their incomes vary thus their quality of performance vary (IFRS, 2005). The theory also discredits the harmonization, since a company may interfere with the accounting methods thus giving wrong and misleading information to potential markets and investors, which can cause adverse effects on the share prices in the capital markets and share indexes (Scott, 2006). By harmonizing the financial reports standards globally, governments can collaborate with strong corporations to create bureaucracies, monopolization and polarization in business economies, destabilizing economies of scale. The Financial Accounting –Normative Theory The financial accounting –normative theory is based on true income. This type of theory is not based on observation but on what would happen to finances if certain factors were introduced. It suggests that the outcome of the finances influenced by elements implementation should be as it was meant to be (McLaney, 2009). It is classified into the true income theory that draws out the roles of accounting, and then provides a single measure of profits, and decision usefulness theory that suggests that a firm can supply certain information to certain class of market or user depending on the assumed decision making needs (IFRS, 2005). The decision usefulness theory allows the firm to ask the decision makers, who are the markets, what information they want, thus enabling the firm supply the best information. The theory emphasizes on the need for the firm to develop models in cohesion with the perceptions of the researcher on what influences good and efficient decision-making. This theory implies that a firm can decide to publish its financial performance based on the needs of its markets. This is an important aspect in harmonizing international financial reporting standards, since investors (existing and potential), can minimize costs due to easy processing of financial information depending on what area they want to venture in. it is more useful when in need of information from corporations wit large financial databases(McLaney, 2009). By posting the necessary information required by user, the company is able to improve its productivity due to an increase in share prices. By adopting to either the positive or normative financial accounting, one is able to understand various elements of accountings and how they can be measured, and implications of using one accounting method over the other (Scott, 2006). Research Methods and Findings For the research, the methodology shall be qualitative. This shall be by use of face-to-face interviews and focus groups discussions. This allows a wide range of opinions, past experiences and possible solutions to the issue of harmonizing the international financial reporting standards (Silverman, 2004). The research findings are that harmonization of standards is possible, effective implementation is dependent on the personnel’s integrity and it helps easy processing of information by investors. The other findings are that it can be affected by influence of politics, cause stagnation due to lack of competition and promote bureaucracy. The methodology is helpful in gaining attitude, behaviour, system values, and concerns, elements of motivations, lifestyle and social culture of people. Moreover, it helps in informing decisions in businesses, formation of policies, research and communication systems. Qualitative research is used to gain insight into people's attitudes, behaviours, value systems, concerns, motivations, aspirations, culture or lifestyles. It is used to inform business decisions, policy formation, communication and research. Research Limitations Since international financial reports standards are to be applied universally, it will be impossible to get respondents across the globe, thus making the findings more generalized i.e. a small quota will represent a large population. This may be faulty since different markets have different economic factors influencing them, different governmental economic involvements and different needs for different users/ markets (Silverman, 2004). Conclusion Harmonization of international financial reports is important in improving international relations; eliminating trade barriers like trade regulations in countries, since they are now uniform, reduce costs of processing financial information by investors, and help investor’s value equity markets from an informed point of view (Saudagaran, 2009). However, it can cause disparities in small economies, which are not favoured by fair value trade, which is a component of harmonized international financial reporting standards. REFLECTION My expectations when doing this research was to find out if harmonization of international financial reporting standards could add value to business, its limitations and how logical it is. Through the research, I was able to find out how businesses can benefit, and the downside of harmonization. Understanding the concepts of accounting theories and implementation of the harmonization process was successful though there was limited access to people from different businesses with different needs and markets, to ensure 100% surety of the research findings. I found out that accounting is important in any business and running of corporations. Through accounting a firm is able to gauge if it has been able to reach the objectives it has set for itself, if elements implemented are producing profits and if they are capable of investing in the stock market or acquire new loans. From the research, I have understood that, as the world markets changes, there is an increasing need for corporations to quickly adapt, be more innovative and inventive to be able to meet the increasing global demands for quality. Harmonization of the international financial reporting standards is just one of the ways that firms can be able to maximize their profits and minimize costs. The research has shed more light on the challenges that come with harmonization. This includes market stagnation, lack of innovations and monopolization that is caused by lack of competition. It can also create polarization and bureaucracy due to interference by politics during policymaking and implementation. This process is important in reinforcing international relations between able economies and small ones. Application of accounting theories is important in meeting the user’s needs, knowing which information to publish; analysing factors that affect accounting and predicting future accounting crises. Given the research findings, I would not change anything when researching the issue of harmonization of reporting standards. References Comte. A. 2010. General View of Positivism. London: General Books LLC. IFRS. 2005. International Financial Reporting Standards. London: Kluwer. McLaney. E. 2009. Business finance: theory and practice. Montreal: Pearson Education. Needles. B.E. & Powers. M. 2009. International Financial Reporting Standards. London: Cengage Learning. Saudagaran .S.M. 2009. International Accounting: A User Perspective. Sidney: CCH. Scott. W. R. 2006. Financial accounting theory. Toronto: Prentice Hall. Silverman . D. 2004. Qualitative research: theory, method and practice. London: SAGE. Read More